Foreign exchange class action certified in B.C.

February 26, 2007

In late December, 2006, the B.C. Supreme Court certified a class proceeding concerning alleged undisclosed commissions on currency transactions. In Cooper v. Merrill Lynch Canada Inc., the plaintiff alleged that Merrill Lynch earned significant commissions and profits on foreign currency conversions arising from securities transactions undertaken for its customers, without having disclosed this fact to customers. That lack of disclosure was asserted as one of the main common issues in this certification motion.

The would-be representative plaintiff alleged that Merrill Lynch had violated its duty as the customer's agent in these transactions, by acting as principal and for its own account. Under agency law, an agent must account to its principal for any secret commissions or profits, whether or not the principal has suffered any loss. Merrill Lynch maintained that it was entitled to act as principal in foreign exchange transactions, which were separate from trading in securities, that its practices reflected both industry standards and business realities, and that customers could not have obtained better foreign exchange rates elsewhere.

In granting certification, Madam Justice Allan accepted a number of common issues, including: whether an agency relationship existed and the nature of the express or implied terms of the contract between the firm and its customers with respect to settlement of foreign exchange transactions; the nature of Merrill Lynch's regulatory and disclosure duties to the customers; industry practice on foreign exchange; global revenue earned from foreign exchange transactions (as opposed to per customer revenue); whether Merrill Lynch's practices were fair and reasonable; and (interestingly) whether the individual knowledge of class members about foreign exchange transactions was relevant.

Although Justice Allan accepted that there were a number of individual issues to be resolved, and conceded that some broker-client relationships might be found to be fiduciary in nature while others would not, she nevertheless held that the resolution of the common issues would advance the claims of class members.

Justice Allan noted the apparently more lenient approach taken in B.C., and declined to follow such decisions as Gariepy in Ontario which have held that there must be actual evidence that a class proceeding will be preferable, and if the class proceeding is "unworkable", little weight should be attached to the fact that individual actions may be impossible. Instead, Justice Allan found that in light of the Hollick and Rumley analysis of preferability by the Supreme Court of Canada, the existence of some individual issues did not militate against certification.

One might expect the many other defendants in similar class proceedings which have already been commenced (against virtually all of the major financial institutions in Canada) to be concerned about this decision. However, each case will be determined on the basis of its own facts and each institution's practices. Moreover, since Justice Allan was clearly influenced by the more "lenient" approach to certification in B.C., perhaps Ontario defendants can draw some legal distinctions (although the "more lenient" approach of the B.C. courts may be in doubt in light of recent Ontario decisions such as Cloud and Pearson). The Merrill case is currently under appeal.

Reproduced with permission of LexisNexis Canada Inc. from the Class Action Defence Quarterly, edited by Kathryn Chalmers, Copyright 2007, for which it was originally written

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